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Warren Buffett Watch
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Warren Buffett was interviewed live by telephone on CNBC's Squawk Box this morning about his surprise investment of at least $5 billion in Goldman Sachs.
A summary is available in the post Warren Buffett to CNBC: Government Bailout Plan Made $5B Goldman Investment Possible.
This is part two of the complete transcript of that conversation. (Click here for part one .. Click here for part three)
CARL QUINTANILLA: Separate from the bailout, Warren, people obviously this morning want to look at the Goldman deal, I guess on top of Mitsubishi-Morgan, which happened yesterday and wasn't nearly as popular, at least from a market point of view. But they want to point to you as the 'canary in the coal mine.' Is that fair? Do you have a problem with that?
WARREN BUFFETT: Well, as long as the canary lives, I'm fine. (Laughs.)
CARL: I'm guessing you're going to live. At least, you're guessing you're going to live?
BUFFETT: Yeah, I think so. (Laughs.) This is, you know, from our standpoint, we've had a lot of cash. And we now are seeing things that, you know, give us a chance to use that cash sensibly. And this was a five billion dollar opportunity to, I think, deploy cash sensibly. I understand, incidentally, that there will be another five billion. In other words, they mentioned 2-1/2 billion, but I think they're going to allocate it down to five billion additional. So Goldman will have ten billion, I believe, of new money coming in.
BECKY: In that capital offering. In the release, they said 2-1/2 billion (of common stock would be offered in addition to Buffett's investment.) You're saying you understand it's five billion?
BUFFETT: Yeah, I think they have quite an outpouring of orders, so I think -- They'll be allocating it down, but I think from all over the world. So I think there will be five billion of additional common stock sold. That will be determined and announced, I believe, before the opening.
JOE: How much do you know about AIG [AIG
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] and their books right now, Warren?
BUFFETT: Well, I think I know a fair amount, but I don't think anybody knew what they needed to know, including the management. The troubles there were in the subsidiary, AIG Financial Products, and they had hundreds of thousands, I'm sure, hundreds and thousands of derivative contracts. And I think that top management did not have their mind around what was involved with those contracts. And you can do a lot of damage on Wall Street with a pen and a piece of paper.
JOE: How many of those units are going to end up under the Berkshire umbrella?
BUFFETT: Well, we would have an interest in a couple of 'em. And actually over that weekend I expressed an interest in one or two, but the pressures were such, and the hole was deep enough, that they simply couldn't get it worked out. And some of those units, most of those units, I believe, will be for sale over the next year or two. And we would be interested in a couple of them. I think they'll probably do a pretty intelligent job of selling them, which means we won't be as good a buyer.
BECKY: You know, Warren, we've been trying to figure out -- I have to admit that I was shocked when I heard the news yesterday about this deal with Goldman, because you haven't put any money into an investment bank since 1987, Salomon. And that was a deal you had to get personally involved with later in 1991 when you went to run the company for almost a year. It was a very difficult experience. I'm shocked that you would get back in with another investment bank. Why do it?
BUFFETT: (Laughs.) Well, the pain has worn off. That won't be happening with Goldman, but I -- That was a very unfortunate experience, and it was actually caused by just a couple of people out of a workforce of 8000 that got the company into big trouble. And I had the help of a lot of people at Salomon in getting out of it. But I don't think this experience will be similar. Goldman has been extremely well run. My experience with Goldman goes back, when I was nine or ten years old my parents took me back to the New York World's Fair, and by an odd chance I got to sit down with Sidney Weinberg, who was the dean of Wall Street then, and he talked to me as if I was a grown-up for 45 minutes. I've never forgotten the experience. Gus Levy (who later ran Goldman in the 1970s) was a good friend of mine when I worked in Wall Street. In 1955, we only had four wires to Wall Street firms and one of them was to Goldman Sachs and Gus was on the other end of the phone. So I've had a long experience with Goldman and they've done a lot of things for me recently.
JOE: I just assume you know what was going on at all of these firms because I know everybody probably came to you and you made your decisions one-by-one on what to do. When you look at the way some of these assets were marked, could you tell that, for example, Lehman still wasn't facing reality and perhaps Merrill Lynch was more in the real world?
BUFFETT: Well, I think that turned out to be the case. I was approached on Lehman back in, I think, maybe it was April or March. But the first round of financing when they raised the four billion, and, yeah, it looked to me like it was pretty unrealistic where they were marking things. I feel good about the Goldman marks, incidentally, that's one of the discussions I've had. And -- You can be pretty fanciful in marking positions in Wall Street, particularly when things aren't trading. The one thing you want to make sure, when the Treasury is buying things, is the marks they have don't make any difference. Like I said, it wouldn't be a bad idea, if you're buying ten billion of a security and you're the Treasury, to have them sell five-hundred million, or something like that into the market, so you find out what the real market price is and then buy the other 9-1/2 billion at that price. I really think, I really think the Treasury will make -- I think they'll pay back the 700 billion and make a considerable amount of money, if they approach it in that manner. But I don't believe in trying to write that into some legislation. I think it gets so unworkable. I think you have a smart person in charge, and have them treat it like it's their own money, and the taxpayers' money, in terms of behavior, and I think it will work out very well. I think it's not comparable to the RTC.
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